During the past several months we've looked at the pros and cons of debt-based alternative lending sources, including use of personal savings, peer-to-peer lending, home equity and credit-card financing. In this issue, we'll delve into equity financing options including angel and venture capital investing. The term "equity investment" typically refers to the investment of funds by individuals, groups or investment funds in exchange for partial ownership ("equity") in the company. The investors hope that the value of their equity will increase and that they will be able to sell it at a significant profit.
Equity Funding Options:
Angel investors: Angel investing has been on an upswing since 2003. Ernst & Young says the number of angel investment groups in the U.S. has more than doubled since 2000. These investors often successful entrepreneurs and small business owners invest in high-risk, high-reward businesses and are often interested in sharing their experience and expertise with other entrepreneurs.
Angel investors often invest a total of $25,000 to $50,000 each year, and aggregate these individual investments with other members of their angel group to make total investments in a particular company in the range of $150,000 to $1.5 million. Forbes calls angel investment a "viable new alternative asset class," noting that angel groups accounted for approximately 40 percent of seed and start-up capital in the first half of 2007, representing the single largest investing group.
Venture capital: Venture capital is a type of private equity funding that typically invests in early-stage, high-potential "growth" companies, often investing $1.5 million or more per project. Venture capitalists are investing for the long-term, with investments generally made as cash in exchange for shares in the invested company.
Fortunately, venture capitalists are not impacted by economic downturns in the same way traditional lending institutions are because VCs rely on liquid capital rather than credit availability. Some VCs say the difficult market has made it easier to find promising companies.
From a small business perspective, VCs offer a good alternative to banks in today's environment because traditional institutions judge applicants on a series of predetermined qualifications. VCs have more latitude to judge individuals and their ideas on a case-by-case basis. Poor market conditions are also known to benefit VC funds, with investors looking at venture funds as a more viable place for their investment dollars than private equity activities.
Next month, we'll start looking at the specifics of what it takes to attain VC or angel investment dollars.
Dave Archer is chief executive officer of Nevada's Center for Entrepreneurship and Technology. Contact him through www.NCET.org.
The information presented in this article is for informational purposes only and should not take the place of professional financial consultation.
